It has been a tough year for Lululemon Athletica (LULU +1.41%). The stock has fallen a whopping 50% just in 2024, which is the deepest drawdown of the last 10 years. As a successful apparel brand that popularized the women's leggings category, Lululemon is seeing slowing revenue growth with mounting competition in North America from upstart athleisure brands. However, it continues to grow like gangbusters outside of North America, and it just announced a large share repurchase program.
The stock keeps falling, making shares cheaper for any potential buyer. Does this give patient investors an opportunity to buy the dip on a stock that has crushed the market over the last 10 years? Let's take a closer look at Lululemon's business and find out.
A steep drawdown, pulling the new product line
At one point, Lululemon stock had posted a 3,000% total return level since going public in 2007. The market has posted a 420% total return over that time span. Today, it is up 1,700% due to the stock's large drawdown, bringing some pain to recent buyers. Long-term shareholders are still crushing the market, though.
So why has the stock fallen? Because of slowing revenue growth in North America, especially in the Women's segment. Due to some poorly received product launches and upstart competitors like Alo and Vuori, revenue in the United States only grew by 2% year over year in the first quarter of 2024. With Men's revenue growing faster than Women's, it is likely that Lululemon's core customers and first fans of the brand (women in North America) had flat or declining sales in the quarter.
A few days ago, Lululemon decided to pull its new leggings line called Breezethrough after a large amount of online backlash. Customers did not like how the leggings made them look and strongly voiced their opinions. Shares fell even further after this report, indicating that the second quarter did not show much of an improvement for the brand in North America.
NASDAQ: LULU
Key Data Points
Can North American women's sales rebound?
To be fair to Lululemon, the rest of its business is thriving. Global Men's revenue is growing 15% year over year, while international revenue is booming, up 35% last quarter. These segments are just much smaller than Women in North America, and therefore not what investors are concerned about. Women drive the majority of sales in North America, which makes up around 75% of global sales (although International makes up a larger percentage every quarter).
The question for investors is whether Lululemon can get this core customer base back to healthy growth. I think it is likely that it can. Management admitted they have misfired on some new product lines and didn't get proper assortment for women's clothes so far in 2024, which has led to the sales slowdown. This is not uncommon for apparel brands.
In the United States, customer foot traffic grew in the first quarter, which indicates that this sales slowdown was self-inflicted and should reverse with new product launches. There are still fans of Lululemon's premium brand who regularly visit stores -- there were just few fans of the new product launches. I believe this is fixable and something Lululemon can work through over the next few years.
LULU PE Ratio data by YCharts.
Should you buy shares?
Lululemon stock now trades at a price-to-earnings ratio (P/E) of 20. This is very close to its lowest earnings ratio of the last 10 years, showing the lowered expectations on the stock after its 50% drawdown. In other words, Wall Street now expects much slower profit growth for Lululemon with the recent struggle the brand has had with women in North America.
I think the concerns over the North American segment are overblown due to the traffic growth still occurring in the United States. Don't forget the fast-growing international segment, either. Even with its home countries going through a rough patch, Lululemon's overall revenue grew by 10% year over year in Q1. Earnings per share (EPS) outpaced revenue and grew by 11%.
With a cheaper stock, management has started to repurchase its outstanding shares. Earlier this year, it announced a new $1 billion share repurchase program that should drive further value for shareholders in the coming years. If the stock keeps falling, these buybacks will start looking more attractive.
Once North America normalizes, it is likely that Lululemon can accelerate revenue growth to close to 15% over the next few years. Add on a P/E well below the S&P 500's multiple of 29 and a share repurchase program, and Lululemon looks like a great buy-the-dip candidate after its stock's large drawdown this year.
